On-demand pay: A benefit that helps drive employee retention

With an uncertain economy and continued stubbornly high inflation, the American worker is under tremendous pressure to pay bills on time and avoid falling into the never-ending cycle of debt. In fact, most Americans are living paycheck to paycheck, meaning they are spending nearly all of their income on basic necessities such as rent, utilities and groceries. This leaves little or no money for savings, investments or discretionary spending and it’s costing companies billions of dollars each year.

Financial stress is damaging for employers and employees

The challenge to make ends meet is taking its toll on the workforce. According to a recent Morgan Stanley study, 66% of workers said financial concerns are negatively affecting their job performance and personal lives. The impact is not only profoundly negative on the employee but also presents negative ramifications for the business. The 2024 Brightplan Wellness Barometer report reveals that employees lose an average of seven hours of productivity each week related to financial stress, costing employers $183 billion annually.

Worse, financial stress is driving employees to leave their jobs. Nearly 8 out of 10 (78%) employers reported that employees’ financial stress led to higher turnover, with workers leaving for higher pay or better financial wellness benefits. The high turnover can be financially crippling for companies. SHRM reports estimate that replacing an employee can cost companies between 50% and 60% of the employee's annual salary. Total costs including recruitment, training and lost productivity can range from 90% to 200% of the employee's salary.

Financial benefits can make a real impact

The onus is now on employers to offer meaningful financial benefits that can help their employees navigate their way through these uncertain financial waters, while incentivizing them to stay with the company.

The key is to offer a benefit that has actual day-to-day relevance in an employee’s life. A report from Lending Tree revealed that nearly half (45%) of Americans have paid at least one bill late in the past 12 months. Yet so often, the issue for workers is that timing of bills and the timing of their pay often don’t align. Simply offering a pay raise does not address the larger issue of being able to pay bills in a timely fashion, which is driving many to take “gig” work to make ends meet. One of the reasons workers take on these side hustles is the access to quick cash to pay bills on time.

Empowering employees with choice and control over the timing of their pay can help solve this conundrum. Forward-thinking employers are leveraging advances in payroll technology to offer financial benefits that can address this misalignment in the timing of pay. These new advancements can mirror the experience workers have with their gig jobs that offer access to pay after each shift.

On-demand pay in an on-demand world

Today's workforce expectations have changed. Nearly everything in their personal life can be accessed on demand. From transportation to food to health care, the American consumer can access nearly anything at the click of a button. Except their pay… until now.

The financial wellness benefit of on-demand pay is typically a voluntary benefit that is free to the employer and is offered alongside 401(k) and tuition reimbursement, among others, in a company’s benefits package. A recent study conducted by DailyPay revealed that on-demand pay ranks as the No. 1 adopted financial wellness benefit in a survey of employers who offer the benefit. The survey also noted that only health care benefits ranked higher in terms of adoption.

What to look for in an on-demand pay benefit

When deciding which on-demand benefit is right for your company, you must consider several critical factors. Firstly, direct integration into a company’s time and attendance system in a quick, efficient way is vital. The last thing you want to do is cause a payroll team to spend extra time and money integrating an on-demand pay platform.

It’s also important to be able to offer access to 100% of net earned pay anytime between payroll cycles and automatically disburse the remaining net earned pay to an employee’s preferred account on their regular payroll date, without any change to an employer’s payroll processes. Often called the “full-funding model,” this is a core differentiator that minimizes risk exposure, maintains negligible fraud losses, provides the ability to scale rapidly, and offers the optimal employer and employee experience.

Finally, it’s important to work with an on-demand pay vendor that provides 24-hour customer service to handle employee inquiries at any time, while mitigating any extra work from the employer.

Don’t get left behind

According to an ADP study, 76% of surveyed employees said it was important for their employer to offer on-demand pay. It has become table stakes when employees are looking for their next place to work. For business, on-demand-pay is the zero-cost benefit that generates tangible returns for employers by reducing absenteeism and turnover costs, estimated to be more than $1 trillion every year.

A study from Arizent last year found that 55% of employees say they pick up at least one extra shift per month with an on-demand pay benefit. Because by granting employees access to their earned money when they need it and providing tools to optimize their income, on-demand pay helps employees maximize their time, achieve financial stability and ultimately become happier and more productive at work.

For companies looking to enhance their benefits packages and attract and retain top talent, integrating on-demand pay can be a strategic advantage, providing a zero-cost solution to address employee financial stress. In today's competitive market, on-demand pay is not just a perk, but a necessary tool for building a resilient and financially secure workforce, aligning perfectly with the insurance industry's focus on risk mitigation and long-term stability.

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Ryan Mang is chief commercial officer with DailyPay. Contact him at [email protected].